On Consumption Bunching under Campbell-Cochrane Habit Formation

Lars Ljungqvist and Harald Uhlig ()

No 337, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: Campbell and Cochrane (1999) propose a preference specification that can explain a wide variety of asset pricing puzzles such as the high equity premium. They augment the basic power utility function with a time-varying subsistence level, or "habit", which is in the spirit of "catching up with the Joneses" but with a novel nonlinear mapping of consumption into habit. This paper demonstrates a surprising implication of the Campbell-Cochrane preference specification: consumption bunching is desirable.

Keywords: Catching-up-with-the-Joneses preferences; habit; consumption bunching (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Pages: 12 pages
Date: 1999-10-22
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (6)

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